Getting Started in Currency Trading Winning in Today''''s Forex Market_4 doc

Basic FOREX Calculations Price Change Exit Price Entry PriceLeverage 100 / Margin PercentMargin Percent 100 / LeverageProfit in Pips Price Change Pip Factor If the Quote Currency i

TABLE 6.9 Profit Threshold

An example of this: If I hit three winners out of every 10 trades (seven ers) and achieve a 3:1 profit-to-loss ratio of $300/$100, I lost $700 but made

los-$900 so I am okay Table 6.9 shows the intersections of these two ratios as Positive,Negative, or Neutral (Profit Threshold) Chapter 16, “Money ManagementSimplified,” discusses the profit threshold in relation to the Campaign TradingMethod

TIP: Depending on your own selected T/P-S/L (Profit-Loss Ratio) youmust know the Profit Threshold Winners-to-Losers Ratio Where does the blackend, the red begin? You do not want to cross that line; if possible, not even comeclose to it

The light gray areas are losing and danger-zone combinations The darkgray area of both high profit-to-loss and high winners-to-losers is difficult tomaintain for any significant number of trades Going there typically means thetrader is using high leverage, investing most of his or her margin, and tradingfrequently Such behavior is not sustainable over long periods of time

For each trade you enter you must consider three factors: Leverage,Account Traded, and Required Margin The information in Table 6.10 is also inTables 6.7, 6.8, and 6.9 but is presented here for ready reference

For Futures Traders

Futures traders tend to think in dollars versus a commodity asset (silver, soybeans,pork bellies, etc.) The switch to co-relational values with ratios—one currencyagainst another—can be a bit trying at first The trick is to practice calculatingprofit and loss for fictitious trades Again, use any of the online calculators avail-able for practice Change each parameter in turn and observe how it alters theothers as well as the outcome It may help to think of a currency pair as a spread

TABLE 6.10 Leverage, Lot Size, Margin

Leverage, Lot Size, Margin

Don’t panic! It is copasetic to learn the various numeric values, calculations, andformulas along the way Practice on your demo account is the way to go formost new traders The most critical at the outset are Profit-and-Loss and ProfitThreshold

Chapter 16, “Money Management Simplified,” shows how to put thesemany factors together into a sustainable plan of action

But the math is not nearly as complex as it may appear at first In fact I canreduce it all to the following cheat sheet Tables 6.1 through 6.10 are availablefor download from the Getting Started section of www.goodmanworks.com

Basic FOREX Calculations

Price Change  Exit Price  Entry PriceLeverage  100 / Margin PercentMargin Percent  100 / LeverageProfit in Pips  Price Change  Pip Factor

If the Quote Currency in a trade  USD, thenProfit in USD  Price Change  Units Traded

If the Base Currency in a trade  USD, thenProfit in USD  Price Change  Units Traded/Exit PriceWhen the profit for non-USD cross rates is being calculated, the followingapplies: The conversion rate is the currency pair with the USD and the quotecurrency of the cross rate pair

If the base currency of the conversion rate  USD, thenProfit in USD  Price Change  Units Traded/Conversion Rate

If the quote currency of the conversion rate  USD, thenProfit in USD  Price Change  Units Traded  Conversion RateYou can now calculate profit and loss during open positions

Learning these basic calculations will endow you with confidence, thing you will need in substantial measure to succeed as a currency trader Buttake your time; full understanding is not mission-critical at the outset Use theTrading Tables for getting started

7

A Guide to FOREX Brokers

Chapter

While regulation has indeed increased, it remains much less robust than

it is in either the securities or commodity futures industries FOREXhas no central clearinghouse, making it a substantially different spacefrom commodity futures or listed securities Prospective traders need to under-stand the differences and ramifications when selecting a FOREX broker

At last count I found more than 100 FOREX broker-dealers with onlineretail platforms Although some of them are Introducing Brokers (IBs) for othercompanies, there remain many full Futures Clearing Merchants (FCM) brokersfrom which to choose

One big improvement since the last edition: Several third-party tradingplatforms with a full complement of features are now offered by multiple bro-kers Previously, moving brokers meant learning a new platform But now, ifyou find a trading platform you like, you can have a wide selection of brokers tochoose for your trading activities The most popular platforms are discussed inChapter 14, “Retail FX Platforms.”

Broker-Dealer Due Diligence

Retail brokers can be divided into market makers (dealers) and ECNs (ElectronicCommunications Networks) ECN is the way the true Interbank market oper-ates ECN brokers can have from one to a dozen liquidity providers Market

makers now also speak in terms of liquidity providers to avoid the stigma of themarket-maker moniker Each approach has advantages and disadvantages Mostretailers are still market makers, but more and more are venturing into the ECNworld The Big Three (see below) now offer a market-maker venue to smalltraders and an ECN venue for their larger and institutional clients Marketmakers are going to be better at providing liquidity in slow or fast markets;ECNs are perceived as more legitimate in not engaging in activities marketmakers have at least been accused of—stop harvesting, ballooning spreads, andrequoting ECN platforms are somewhat more difficult to use and require morediligence on the part of the trader.

The beginner should first determine what tools he or she will need to trade

Of course, the more you study, the more you learn and the more you want Yourneeds may change Download and conduct due diligence on at least five of these

broker-dealers’ demo platforms Today, many brokers provide a variety of ent platforms to even small traders Use the checklist I provide to research theirservices in the categories noted and how they relate to your needs Keep notes Ianswer some of the questions for you; more can be found on their web sites, intheir documents, and on the FOREX Internet review boards and forums

differ-I like to send an e-mail question or two to sales to gather information butalso to see if and how they respond Ask to be contacted back by e-mail Mostsales reps will ignore your request and call you, a few will e-mail you, and manywill not contact you at all or simply add you to an automated mailing list Sixyears after writing the first pages of the first edition of Getting Started in Currency Trading, I continue to be amazed by the inability of many broker-

dealers to answer an e-mail at all—much less in a timely manner!

Increasing capital requirements for retail broker-dealers will continue toshake up the retail FOREX industry I also expect mergers between major play-ers to continue and even a musical chairs effect is on the horizon as smaller firmsjockey for position vis-à-vis increasingly onerous regulations The entire market-making paradigm may be in a fast fade Most traders now have multiplebrokers—typically a primary and two secondary broker-dealers Given the flux

of the industry, this seems like a good idea

Traders have vastly different experiences with brokers Listed below aresome that I would not fund with five cents but that receive wonderful reviewsfrom others Certainly study the reviews—but in the end, make your own call.Use the Broker Due Diligence form to keep track of the brokers youreview and or test The reader can download this from the Getting Started sec-tion of www.goodmanworks.com

TIP: The author has used 14 FOREX brokers in the past 10 years of ing No broker is even close to perfect Dealing with a FOREX broker—nomatter how good they are—is part of the business of trading Use at least oneprimary broker and two back-ups Do not let poor communication from

trad-brokers distract you Do not be surprised when a previously great broker turnsmediocre for no apparent reason Keep your eye on the ball.

Demo Accounts

Always start with a Demo Account! All retail FOREX brokers offer theseaccounts This account allows you to preview most of the broker’s platform fea-tures and become familiar with how charting, indicators, order placement, andaccounting are handled Do one survey of demos to decide which brokers totake to the next level with a micro-account or mini-account Typically a micro-account allows for trades of as little as 1,000 units; a mini-account, for 10,000units There may be some difference between the demo account and a real-timeaccount, especially in the data-feed and order types; make an effort to find outwhat these are for each broker on which you do due diligence

Market Maker or ECN?

Market maker or ECN is the single most critical distinction between FOREXbroker-dealers A market maker, or dealer, is always the counterparty to yourtrades; an ECN requires an actual counter order for execution Given the liquid-ity of the FOREX markets a counter order is only a problem in a very fast or veryslow market or if you place an extremely large order An ECN cannot play many

of the games that market makers do—in large part they do not need to becausethey have no book to balance But ECN trading also requires a more accurateand delicate trading touch—an additional skill that the trader must acquire.Regarding market makers: Some are good, even very good; many are awful.Keep in mind what “counterparty to your trade” means Then remember that mar-ket makers hold all the cards—the data stream, the dealing desk, or control viatheir liquidity providers with an NDD (No Dealing Desk), the trading platform,and all the tools—requoting, pip spreads, trading rules, dealer intervention,accepting or canceling trades—all for the supposed purpose of maintaining anorderly market National Futures Association (NFA) Compliance Rule 2-43 hasminimized some of these factors—but not eliminated them by any means Progress

is being made but continued excesses will make them the dinosaurs of the industry.ECNs have their own issues—the biggest one is that their platforms aremore difficult to learn and use effectively They are often bare bones and requireintegration of third-party charting and technical services But they have muchless leeway because they are functionally trade matchers In fast or slow marketsliquidity may actually be worse with an ECN because they do not have many ofthe orderly market tools at their disposal But on balance, I feel that once you

have gotten your feet wet in FOREX shop for an ECN Several retail brokers areoffering ECN trading to even mini-accounts How they bundle 10k lots into a250k bank lot without intervention I have not fully determined.

The core issue—and the reason the author predicted in the second editionthat market makers would lose ground to ECNs—is that market makers manip-ulate the book to maintain order This involves a number of activities such asrequoting, dealer intervention, and setting pip spread—as and when theyplease Market makers trade against their customers—it is why and how they arewhat they are A profit for you may well be a loss for them What would you do

with a customer who cost you money on a consistent basis?

Market makers set, manipulate, or control pip spreads usually as legitimateoperations of the market-making process; ECNs generally do not Many tradingplatforms—both market maker and ECS—provide depth of market (DOM):the ability to see standing buy and sell orders, the quantities and prices bid andasked This can be valuable information if you learn how to use it properly

To complicate matters some firms that are obviously market makers nowadvertise a no dealing desk The author is unsure how such a hybrid operates; insome instances it appears to be nothing more than semantics in an effort toshake the market-maker moniker Lack of regulation makes knowing how abroker-dealer processes trades difficult if not impossible The author queriedfive such brokers about this process and received no response from four of themand what can only be described as “mumbo-jumbo” from the other one Moreand more brokers are attempting to distance themselves from the market-makerlabel, but whether they are actually making any significant changes to howthey execute trades remains a question in many instances You will hear the term

liquidity provider from both ECNs and market makers For a market maker it

really has little meaning but it sounds good It does not matter how many uidity providers a broker-dealer has if it stops the feed to sniff and/or manipulate

liq-it before passing liq-it through to the customer

In reviewing the fine print of account forms you notice that even ECNswithhold the right to intervene as market makers Yes, it is confusing! InFOREX, ultimately, “You pay your money and you take your pick.”

The rationale for using an IB is that they may offer a higher level of tomer care or value-add services you want and cannot get from the broker-dealer An example of a value-add IB is HawaiiFOREX (GFTFOREX), whichoffers a structured educational program currently based on the work of JoeDiNapoli; www.atcbrokers.com (FXCM) with a variety of platforms Servicecan also be a legitimate reason to prefer an IB over its own FCM as in theinstance of www.tradeviewforex.com (IKONGM) although in this particularcase the FCM also offers excellent customer care Of course, everyone in thechain wants to get fed although markups are generally quite small.

cus-No two traders are alike, and the landscape is constantly changing Brokerrecommendations per se are risky business That said, the author’s consensusopinion is that the new trader should open a demo account with one of the BigThree, an ECN, a market maker, and perhaps an IB to get a good look at thebroker-dealer landscape If your FOREX career blossoms—and we hope itdoes—move on to one of the larger ECN brokers It is now possible to actuallystart with an ECN, but I still recommend testing the waters with a marketmaker in the mix See Appendix A, “How the FOREX Game Is Played,” whichdiscusses the current issues of importance to traders with respect to broker-dealer structure and practices

All of this said, over the past five years things have gotten better, notworse, for the retail FOREX trader What is true today may not be truetomorrow—one reason most traders hold accounts with multiple brokers

Platform Capabilities

Perhaps most critical to the trader is a broker-dealer’s platform capabilities Duediligence, vis-à-vis your needs, will take some time and effort on your part Here iswhat to look for in several categories Learn everything possible before making atrade Demo accounts are ideal for this purpose Many brokers now offer one ofseveral standard trading platforms from independent vendors The three mostpopular platforms are NinjaTrader, MetaTrader, and eSignal If you find a platformyou like (see Chapter 14, “Retail FX Platforms”) you will want to endeavor to tradeonly with brokers offering that platform The trend today is clearly toward every-thing under one roof—quotes, charts, indicators, order-entry, and programming

Trading Tools

Traders are fascinated by charts, numbers, and indicators, and most dealers are happy to accommodate them Downloading a demo account willgive you a good idea of the toolset available In a few instances the demo does

broker-not offer the entire palette so you need a mini-account to see and test driveeverything Not sure? Ask the broker.

Most platforms offer integrated charting and technical studies capability.For those platforms that do not, you need to access a third-party vendor Werecommend an integrated platform for the novice

Unless you have a unique trading tool, the days of needing to access a ker’s platform for order entry and a separate platform for market analysis arecoming to an end Today’s platforms do all the integration for you

bro-Most of the popular indicators are available—moving averages, stochastics,relative strength, oscillators, Bollinger bands, and many others (See Figure 7.1)

FIGURE 7.1 Technical Indicators

Source: www.ninjatrader.com

Bar charts with a variety of settings for time frames and units are offered.The new MetaTrader-5 platform has 21 preset time frames and if that is not suf-ficient, you can custom configure more—as many as you like with NinjaTrader.

Be sure the dealer has what you need; integrated charting capability is a must,especially for the new trader Swing charts, candlesticks, and point and figurecharts are also available

Most platforms offer a palette by which you can customize the look andfeel of charts The size, scale, and coloring of charts can make a big difference toyour interpretation of them As an experiment, take a single pair with the sametime scale and unit and make a half-dozen or so charts with different parame-ters My advice to the beginner is to keep all charts in the same size and colorscheme Trading is an extremely delicate process, and even small differencesmatter

It is best if you have some idea of what you want before beginning yourdue diligence Some primary considerations: colors, sizing/scaling, time frames,vertical and horizontal scrolling, printing As an old-time trader, the author stilllikes to print charts for analysis

TIP: Do not let the plethora of indicators and charts overwhelm you Irecommend that you initially work with bar charts, moving averages, and anoscillator Learn them one at a time Once comfortable, pick an Indicator of theWeek to add to your platform and study

The Trader’s Desktop

How easy is it to place and monitor your orders? View your charts and technicalindicators? Most retail dealers do a great job of this but layout and organizationvary Those factors can be important depending on how you trade, especially ifyou trade frequently Can that information be easily backed up or saved? Almostall broker-dealers and integrated platform vendors have this process down pat;much of your decision is a matter of personal style (See Figure 7.2.)

News

Most broker-dealers offer news feeds and news and announcement calendars.There are many third-party providers, but for the average trader what is offeredintegrated on trader platforms is enough Do not get mesmerized by the news,but do watch and note how the market reacts to it

The author uses a small proprietary program for NinjaTrader, which helpstrack upcoming news announcements Commercial equivalents are nowbecoming available

FIGURE 7.2 Trading Platform

Source: www.ninjatrader.com

Platform Stability and Backbone

As we have mentioned above, trading platforms are enormously complex ware programs Real-time delivery of information is also a daunting task Putthose factors together and it is a minor miracle they work as well as they do But things happen One of the biggest brokers had their trading platform crashfor almost 24 hours in February 2007 Platform stability has improved enor-mously in the past few years

soft-What backbone is a prospective broker-dealer using—Windows, Java,Web-based, or Flash? Windows is the most stable, and Java is cross-platform ifyou are using a Mac computer At one time Java platforms had a bad habit ofcrashing under heavy loads but that seems for the most part to have been reme-died If you use Java do not install the latest Sun update without getting the okay

from your broker-dealer Updates are supposed to be downwardly compatible,but there is a lot going on in a real-time trading platform Having owned a webconferencing business, author Archer has been leery of Java, but it has improved

a great deal recently

Flash platforms are available, but they do not have the years of ment behind them that Windows and Java platforms do Flash platforms havepotential, once developers in FOREX get a handle on the immense Macromediatool set